Discovery dropped $14.6 billion to buy the dying cable TV business model more time

Having spent
$14.6 billion to buy Scripps, Discovery has more
negotiating leverage with TV distributors and
advertisers.That's good news for smaller cable networks that could
otherwise be on the chopping block.The Discovery-Scripps combo can also look to accelerate
the growth of data-driven TV ads and digital.

There are many reasons that Discovery Communications is snatching
up fellow cable TV stalwart Scripps Networks for $14.6 billion.
But there's one that stands out: this buys the dying cable TV
business model more time.

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In the short term Discovery gets more leverage to squeeze as much
as it can out of the cable model. More specifically, the combined
power of the two companies makes it easier to keep smaller yet
solid revenue producing networks alive for a few more years until
the cable business reinvents itself.

But now with Scripps, Discovery boasts of 19 cable channels,
including five of the top 10 rated cable networks among women
aged 25 to 54. Over the next few years, when it negotiates with
traditional distributors like Comcast or Time Warner, it can say
to those companies something like:

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"If you want to offer Discovery or Food Network, you need to also
pay us to carry smaller networks like Velocity or Great American
Country."

And as Discovery executives negotiate with newer cable
alternatives (the so called "skinny bundles") like YouTube TV or
Sling TV, they also now have a much better chance to make
sure their networks make the skinny bundle cut.

The company can have the same type of horse-trading conversations
with advertisers: "If you want to run ads on our highest rated
networks, well, you need to buy some ads on our smaller
networks."

In a few years, the TV business will likely have been reshaped
dramatically. But cable executives believe that there are several
more lucrative years ahead before cord-cutting and streaming do
irreparable damage. So the Discovery-Scripps combo lets them
wring as much cash out of cable's envied dual revenue business
model (where they make money from subscription fees and ads) for
as long as they can.

Here are some other benefits for Discovery:

Discovery is now more of a digital player

It's worth noting that Discovery recently invested in the digital
content rollup Group
Nine Media, which includes publishers like Thrillist and
NowThis. Now, between Discovery and Scripps, the company believes
it can better compete with the BuzzFeeds of the world in web
video scale and video ad money.

Plus, like in the cable universe, Discovery has more clout when
negotiating deals with the likes of Facebook, YouTube and
Snapchat.

Discovery has a better chance to shape the future of
ads

As digital advertising surges and traditional TV viewing dips,
the TV industry has looked to embrace data and technology to
offer more advanced ad targeting. That's the premise behind
Open AP, a joint initiative between Viacom, Turner and Fox
aimed at accelerating this trend. Now with Scripps, Discovery can
essentially build its own version of that data-infused TV ad
platform, theoretically enabling advertisers to buy ads reaching
specific audiences, such as new moms eyeing minivans in the next
six months.

Among Scripps' quiet strengths in this realm: it has a large
amount of data on consumers from an ongoing series of sweepstakes
and special products it delivers to viewers, like HGTV's
"Smart Home" giveaway. And Scripps also makes web video
content on behalf of many advertisers.

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Media companies are feeling pressure to invest in artificial intelligence

source

REUTERS/Fabrizio Bensch

It
should be easier to invest in new technology

For any big TV company, there's an ongoing need to invest in
technology and engineering talent. These are areas the TV
business isn't necessarily known for. Yet these companies can't
make every bet. They can't build their own ad tech and VR studio
and artful intelligence lab, for example. The combined heft of
Scripps and Discovery lets the two companies spread out these
costs more effectively.

There are lots of other motivations for the deal, such as:

Scripps networks have lots of room to grow internationally,
where Discovery is strong.
The company is better positioned to launch its own
"non-sports" skinny TV bundle.
The company's fledgling Discovery GO app, which allows
cable subscribers to log in and watch shows on
demand, already makes Discovery tens of millions of
dollars, according to a person familiar with the matter. After
this deal, that app can now be bolstered by all of
Scripps' shows.
The two companies say they'll save a lot of money,
referencing an "estimated $350M annualized run rate cost
synergies"